But streaming technology isn't up to scratch yet, says Spencer.
Cloud gaming will replace home consoles "someday", Microsoft has suggested, saying that the firm is "clearly invested [in] cloud distribution of content".
"Someday, yes, someday," replied Microsoft Game Studios head Phil Spencer when asked by news.com.au whether the cloud will one day negate the need for home consoles by streaming game content directly to consumers' TVs.
"Cloud is a huge opportunity. But if you look at the internet capabilities today, it's a challenge.
"Even, forget about games. If you said everybody was going to watch the Champions League Final concurrently via the internet at HD-level quality, the internet can't handle that. And that's just people watching a [soccer] game. That doesn't include the level of interactivity of a game and a two-way pipe going back and forth. So there's just bandwidth issues in terms of metering and things that are out there.
"So I believe, yes, in the long run we'll land in a spot where there's cloud distribution of all content and Microsoft is clearly invested in that."
But could Microsoft's next-generation Xbox be built solely around cloud-based gaming? Judging by Spencer's comments, probably not.
"I like the work that Gaikai does, I play games on Gaikai, and if I get the right bandwidth situation they're actually good experiences. But today it's not really up to scale.
"You're still going to be pushing boxes out to people's houses that they're going to plug into the TV. That's what they're going to use to play their AAA games. And I think that'll be the case for a while."
Microsoft has yet to announce plans for its next-generation console despite reports that numerous developers are already developing titles for it.
Rumours earlier this year also suggested that the next Xbox, codenamed 'Durango', had already entered manufacturing.